10 Principles of Marketing Pricing Products Understanding Customer

10 Principles of Marketing Pricing Products: Understanding Customer Value & Pricing Strategies

What Is Price? Price is the amount of money charged for a product or service. It is the sum of all the values that consumers give up in order to gain the benefits of having or using a product or service. Price is the only element in the marketing mix that produces revenue; all other elements represent costs

Factors to Consider When Setting Prices Customer Perception of Value-based pricing uses the buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Price is considered before the marketing program is set. GT Automobiles. Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort & risk. Southeast Airlines, Dell. • • Value-based pricing is customer driven Cost-based pricing is product driven

Factors to Consider When Setting Prices Value-based pricing • • Good-value pricing offers the right combination of quality and good service to fair price. Wal-Mart, Mc. Donalds Value-added pricing: Attaching value added features & services to differentiate a company’s offers & to support higher prices. Grameen. Phone, Caterpillar.

Factors to Consider When Setting Prices Everyday low pricing (EDLP) involves charging a constant everyday low price with few or no temporary price discounts. (Wal-mart) High-low pricing involves charging higher prices on an everyday basis but running frequent promotion to lower prices temporarily on selected items

Factors to Consider When Setting Prices Types of costs Fixed costs are the costs that do not vary with production or sales level. Rent, Interest Expense, Executive salaries Variable costs are the costs that vary with the level of production. Packaging, Raw materials. Total costs are the sum of the fixed and variable costs for any given level of production

Factors to Consider When Setting Prices Experience or learning curve is the drop in the average per unit production cost that comes with accumulated production experience. Cost Plus Pricing is adding a standard markup to the cost of the product. (Pricing strategies page 291 -292)

Cost Plus Pricing A marker manufacturer’s Variable cost : tk. 10 Fixed Cost : tk. 300, 000 Expected Unit sales: tk 50, 000 Then the manufacturer’s cost per marker is given by: Fixed cost Unit cost = Variable cost + Unit sales = tk. 10 + (tk 300, 000 / 50, 000) = tk. 16

q Now suppose the manufacturer wants to earn a 20% markup on sales. The manufacturers markup price is given by: Unit Cost Markup Price = (1 - Desired Return on Sales) = tk 16 / (1 - 0. 2) = tk 20. The manufacturer would charge dealers /wholesalers /retailers tk 20 per marker & make a profit of tk 4 per unit. Markup pricing works in the cases when price actually brings in the expected level of sales.

New-Product Pricing Strategies Market skimming pricing is a strategy with high initial prices to “skim” revenue layers from the market. (Sony’s HDTV in Japanese market) • • • Product quality & image must support the price Buyers must want the product at the price Competitors should not be able to enter the market easily

New-Product Pricing Strategies Market penetration pricing sets a low initial price in order to penetrate the market quickly & deeply to attract a large number of buyers quickly to gain market share. (Banglalink, Dell vs. IBM & Apple) • Price sensitive market

Product Mix Pricing Strategies Product line pricing takes into account the cost differences between products in the line, customer evaluation of their features, and competitors’ prices. (Unilever, Fit & Elegance suits) Optional product pricing takes into account optional or accessory products along with the main product. (Refrigerators with icemakers, Cars with CD changers) Captive product pricing involves products that must be used along with the main product (blades for a razor, flim for a camera, Gillette, HP)

Price Adjustment Strategies By-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery. (Petroleum, agricultural & chemical by products) Product bundle pricing combines several products & offering the bundle at a reduced price. (Fast food restaurants)

Price Adjustment Strategies • • Discount & allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing

Price Adjustment Strategies Discount & allowance pricing reduces prices to reward customer responses such as paying early or promoting the product • Discounts • Cash discount for paying promptly • Quantity discount for buying in large volume • Functional (trade) discount for selling, storing, distribution, and record keeping

Price Adjustment Strategies • Allowances • • Trade in allowance for turning in an old item when buying a new one Promotional allowance to reward dealers for participating in advertising or sales support programs

Price Adjustment Strategies Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost • Customer segment pricing • Product form segment pricing • Location pricing Geographic Pricing setting prices for customers located in different parts of the country or world.

Price Adjustment Strategies Customer segment pricing is when different customers pay different prices for the same product or service Product form segment pricing is when different versions of the product are priced differently but not according to differences in cost Location pricing is when the product is sold in different geographic areas and priced differently in those areas, even thought the cost is the same

Price Adjustment Strategies Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics • Reference prices are prices that buyers carry in their minds and refer to when looking at a given product • Noting current prices • Remembering past prices • Assessing the buying situation

Price Adjustment Strategies n Promotional Pricing: Temporarily pricing products below the list price, & sometimes even below cost, to increase short run sales. Risks of promotional pricing • Used too frequently, and copies by competitors can create “deal-prone” customers who will wait for promotions and avoid buying at regular price • Creates price wars

Price Adjustment Strategies Dynamic pricing is when prices are adjusted continually to meet the characteristics and needs of the individual customer and situations International pricing is when prices are set in a specific country based on country-specific factors • Economic conditions • Competitive conditions • Laws and regulations • Infrastructure • Company marketing objective

Price Changes Initiating Pricing Changes Price cuts is a reduction in price • Excess capacity • Increase market share Price increases is an increase in selling price • Cost inflation • Increased demand lack of supply

Price Changes Buyer Reactions to Pricing Changes Price cuts • • New models will be available Models are not selling well Quality issues Price increases • • • Product is “hot” Company greed